Tax loss harvesting

Since Budget 2024, the taxman takes 20% of your short-term equity gains and 12.5% of your long-term gains above Rs 1.25 lakh a year. Every investor grumbles about this. Very few do the one thing the law hands them in return: bank their losses.

Most people treat a losing stock like an embarrassing relative. They do not want to talk about it, and they definitely do not want to sell it, because selling makes the loss real. So it sits in the portfolio for years, “waiting to come back”. That instinct costs money twice: once in the stock, and again in the tax break you refused to collect.

The idea in one paragraph

Tax-loss harvesting is selling a losing investment to convert a paper loss into a realised capital loss. That realised loss offsets capital gains elsewhere in your portfolio, which cuts your tax bill this year. If you still like the investment, you can buy it back. You keep the same exposure and pocket a tax deduction. India has no wash-sale rule, unlike the US, so the law does not stop you from re-entering. The only real constraint is mechanical, and I will get to it.

The set-off asymmetry decides what to harvest first

India’s rules are not symmetric. A short-term capital loss can be set off against both short-term and long-term gains. A long-term capital loss can only be set off against long-term gains. Since short-term gains are taxed at 20%, the most valuable rupee of loss is a short-term one, because it can cancel the most heavily taxed rupee of gain.

So the order matters. If you hold both kinds of losers, harvest the short-term ones first. And one detail people trip over: the Rs 1.25 lakh annual LTCG exemption applies only after losses are set off. Losses eat into your taxable gains before the exemption does.

Losses keep for eight years, if you file on time

If your losses exceed your gains in a year, the leftover carries forward for up to eight assessment years, ready to offset future gains. There is one hard condition: you must file your ITR before the due date. File late and the carry-forward is gone, permanently. The loss still hurts, it just stops being useful.

The practical catch: same-day buybacks

In theory you sell the loser and buy it back the same day. In practice, for delivery trades in the same stock, a same-day sell and buy can net off in settlement and no realised loss is created. The clean ways around it: sell and repurchase the next trading day, accepting overnight price risk, or move to a close substitute immediately. Selling one Nifty 50 ETF and buying another the same minute keeps your market exposure identical while the loss books cleanly. For an individual stock, the substitute is weaker, so most people use the next-day route.

The mirror image: gain harvesting

The same logic runs in reverse. Every year, the first Rs 1.25 lakh of long-term equity gains is tax-free, and unused exemption does not carry forward. If you have long-term winners and headroom left in March, selling and rebuying resets your cost price higher at zero tax. Over a decade, that annual reset shaves a meaningful amount off the eventual bill. March is when both of these belong on your checklist, losses and gains together.

What it is worth

Say you realised Rs 2 lakh of short-term gains this year and you hold a stock sitting Rs 80,000 below your purchase price. Doing nothing costs you Rs 40,000 in STCG tax. Harvesting the loss brings the taxable gain down to Rs 1.2 lakh and the tax to Rs 24,000. Sixteen thousand rupees, for two orders and a day of patience.

None of this makes a bad investment good. A loss harvested for tax is still a loss. But if the market has already handed you the lemons, the least you can do is claim the sugar the tax code offers with them.